ABSTRACT
This chapter focuses on the impact of the real exchange rate and domestic policy decisions on savings and investment behaviour and sectoral output growth in Papua New Guinea (PNG), in order to examine the theoretical propositions of the 'theory of booming sector'. It presents a model based on the analytical framework to estimate the effects of a resources boom and the real exchange rate on sectoral growth. The chapter provides the empirical model and discusses data sources, variable definitions and measurement. It describes savings and investment behaviour and assesses the macroeconomic policy impacts on the long-term growth of the economy over the study period. Sectoral growth of an economy is determined by several real, nominal and policy variables. Real exchange rate plays a key role in determining sectoral growth of an economy. The traditional analysis of the relationship between growth and savings stems from the analysis of the impact of domestic savings on investment, which subsequently transforms into higher growth.
